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Exploring Dilemmas of Resource Development in the Latin American Oil and Gas Industry

February 19, 2013

By Louisa Lund, Consortium for Energy Policy Research program director

Countries have taken different paths in balancing the desire for outside investment to help with the development of oil resources, with the recurring temptation to change the terms of the deal when investments become lower risk and more profitable.

Francisco Monaldi, Robert F. Kennedy Visiting Professor of Latin American Studies, spoke in the Energy Policy Seminar series on Monday (Feb 11), examining the contrasting paths taken by Latin American countries in the development of their oil and gas resources.

While government moves to expropriate oil company profits are often considered to be ideologically motivated, Monaldi argued that the inherent dynamics of oil investment as it has often been carried out in Latin America – high and volatile rents, high sunk costs, and tax systems where government’s share fails to keep pace with the growth of oil profits, among other factors — combine to create an almost irresistible pressure for governments to change original contract terms, independent of ideology.

In some cases, Monaldi suggested, a history of expropriating outside oil and gas investors may be contributing to a current situation of relatively low rates of oil production relative to proven reserves. Latin America has the highest ratio of reserves to oil production of any part of the world, by a wide margin, with Venezuela standing out as an extreme case.

Monaldi examined several different cases in which different policies and situations seem to be producing different outcomes, including Venezuela, Mexico, and Brazil, the three countries with the most significant proven oil reserves in Latin America.

In Venezuela, a startlingly low production rate of 0.3 percent of proven reserves per year may be linked to the government reneging on contracts and increasing taxes. Mexico faces declining oil production after a long period of relatively low investment. Brazil has been considered a model for energy policy, but domestic subsidies have been contributing to a worsening oil trade balance.

Professor Monaldi is visiting Harvard Kennedy School this year. He is the Director of the Center on Energy and the Environment at the Institute of Advanced Studies in Administration in Caracas, Venezuela.

"In some cases, a history of expropriating outside oil and gas investors may be contributing to a current situation of relatively low rates of oil production relative to proven reserves," said Monaldi.